'Carbon bubble' risk to financial stability, MPs warn

06 March 2014

Stock markets could be inflating a ‘carbon bubble’ by over-valuing companies with fossil fuel assets that will have to be left unburned in order to limit climate change, MPs have warned.

In a report, being launched in the City of London today, the Environmental Audit Committee also points out that there is a large green finance gap. Investments are currently running at less than half of the £200 billion needed in energy infrastructure alone by 2020 to deliver national and international emissions reduction targets.

Chair's Comments

Chair of the Environmental Audit Committee, Joan Walley MP, said:

“The UK Government and Bank of England must not be complacent about the risks of carbon exposure in the world economy. Financial stability could be threatened if shares in fossil fuel companies turn out to be over-valued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilising the climate. The record-breaking extreme weather events causing chaos across the globe should be a wake-up call. The transition to a low carbon economy will be much more painful if we wait until there is a climate crisis before recognising that more than half of the world’s fossil fuel reserves will have to remain in the ground.”


The Bank of England’s Financial Policy Committee should seek advice from the independent Committee on Climate Change to help it monitor the systemic risk to financial stability associated with a carbon bubble, the report recommends.

The Government should also ensure that company reporting requirements provide investors with the information required to assess carbon exposure.

To address the green finance gap, the Government must provide a joined-up, stable and certain policy framework that maintains investor confidence and helps markets price in the cost of carbon. It should abandon its review of the 4th Carbon Budget (2023-2027) and use the implementation of the Electricity Market Reform to make a clear commitment to avoiding further unplanned regulatory and subsidy changes for low-carbon energy by setting a 2030 carbon intensity target and setting out indicative funding levels in the Levy Control Framework until that date.

The Green Investment Bank

The Green Investment Bank established by the Coalition has made a good start, according to the report, using its initial capitalisation to make a number of useful investments– such as financing low-energy street lighting, by offering local authorities low fixed-rate loans to be repaid from the resulting savings. However, the bank does not currently have the power to borrow in order to leverage and enlarge its investments - limiting its potential to fill the green finance gap.

The Government had pledged to allow the bank to borrow from 2015-16, but the MPs are concerned that transfer of these powers will be further delayed if the condition that the Government has set of debt falling as a percentage of GDP by 2015-16 is not met. Several witnesses to the inquiry questioned why the Bank's borrowing should be controlled when the similar KfW bank in Germany borrowed significant sums in order to provide extensive loan finance to renewables and energy efficiency schemes, particularly community schemes.

Joan Walley MP:

“Allowing the Green Investment Bank to borrow would boost green investment and create jobs, and should not be delayed even if public debt is flat rather than falling in 2015-16.  In Germany their green investment bank has driven a massive home energy efficiency programme by providing loans at lower than market rates through high street banks – and writing off some of the loan if refurbishment makes the house ‘near zero’ carbon homes standard. The Government could help insulate consumers against rising energy bills and support jobs in the home improvement industry by reducing the interest rate on Green Deal loans in line with the more attractive Help to Buy scheme.”

Green Deal

The Committee is pleased that the Green Investment Bank has provided funding for the Green Deal energy efficiency schemes. However, take up has been poor and the number of schemes financed by the Green Deal, at less than 1,000, is still some way off what has been achieved in Germany, where, in 2011 alone, the KfW bank financed 360,000 whole house upgrades, supporting 370,000 jobs. The Government must make the Green Deal simpler and more attractive to households. Ministers should consider reducing the assessment fee and interest rate to mirror the more attractive terms of the Help to Buy scheme’s 1.75% equity loans.

Community Energy Investment

The Committee is concerned that the European Commission’s  (EC) proposed new rules for State Aid in the energy sector could limit the finance available to support community owned energy schemes.  The MPs want the Government to insist that EC proposals, to reduce the threshold for small-scale feed-in tariffs to below 2MW, are dropped because they risk undermining the viability of community schemes.  Priority also needs to be given to securing early State Aid approval for the Green Investment Bank to invest in community energy.

International Agreement

The report points out that reducing fossil fuel investment in the short to medium term will depend on investors having confidence that the international community will agree a credible and significant commitment to reduce emissions. The Committee calls on the Government to continue to play a central role in agreeing ambitious and binding international commitments on climate change, both in the EU and in the run up to the UN climate talks in Paris 2015.


In 2010, governments agreed at the UN climate conference in Cancun that greenhouse gas emissions should be reduced to avoid a rise in global average temperature of more than 2°C above pre-industrial levels, with the possibility of revising this down to 1.5°C.

Keeping temperature rises below the 2°C level would require the carbon contained in 60-80% of the coal, oil and gas reserves of listed firms to remain unburned or be kept out of the atmosphere using carbon capture and storage, research by Carbon Tracker and the LSE Grantham Institute has suggested.

In 2012 international agreement was reached to draw up a binding UN global climate deal by 2015 and to extend the Kyoto protocol until that deal comes into effect. Governments will meet again later this year in Lima to work towards the details of a possible legally binding deal in Paris in 2015.

Correction (paragraph 46 of the report):
Jonathan Maxwell is from Sustainable Development Capital. DECC advise that the investment in Greencoat investors was provided by BIS.

Further information

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